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Is Russia Dropping an Iron Curtain Around its Home Care Market?

On 25 August 2015, Rospotrebnadzor (the Russian Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing) ordered Russian retailers to remove 12 home and personal care SKUs from their shelves – including Henkel’s Persil and Procter & Gamble’s Tide/Ariel as well as products from five other home or personal care manufacturers. This move by Russia’s consumer market regulator would, on the face of it, appear to represent another round of bans echoing similar moves that have affected other industries since March 2014.

Much of the international media furore suggested this was indeed the case – a continuation of the “sanction wars” that ensued following 2014’s economic embargo. Russia’s initial bans were exclusively targeted at imports of perishable foodstuffs from the EU and the US as a reaction to the economic embargo imposed on the country. While the media cried out “sanctions”, this was a misrepresentation of the underlying issue. The regulator had, in fact, only obliged retailers to remove a narrow range of products – 12 SKUs – due to safety concerns over toxicity levels. The reaction by the market following the regulator’s removal order set in motion a chain of events unfavourable to the industry.

According to the APCoHM (Russian Association of Perfumery, Cosmetics, Household Chemistry, and Hygienic Goods Manufacturers), the vagueness in the regulator’s statement behind the removal of the 12 SKUs had resulted in concern among retailers. Russian retailers were concerned about the possibility that the ban would be extended to a wider portfolio, so they took the cautionary step of halting the purchase and stocking of brands manufactured by the seven cited companies. This was seen with Henkel’s Vernel, which took a hit as retailers independently decided to remove it from their shelves, despite it not being a brand listed by Rospotrebnadzor among the three Henkel SKUs that were included.

Why is a ban unlikely in Russia’s homecaremarket?

Conditions in the Russian homecaremarket are vastly different to those in the food import market for a number of reasons. The Russian government’s imposition of a ban on homecare goods does not make sense, firstly, because the two biggest companies that are affected by the product ban, although multinational, mostly manufacture their products domestically. In fact, Henkel Russia announced earlier in 2015 that it had opened its ninth production facility in Russia, thus a ban in this market would be a greatly felt disruptive action, and one that would be blamed on the government.

Secondly, if the restrictions on the respective homecare SKUs were due to safety concerns over toxicity then the issue should be quickly resolved following any consultation with the regulator and product adjustment by the manufacturers. Otherwise, if the restriction is a political one, then intensifying bans on domestically produced multinational homecare products will further feed inflationary pressures in this market.

Henkel and Procter & Gamble accounted for around 45% of market value sales in 2014, according to Euromonitor International, making an outright ban problematic (and likely downright unpopular) for the government. Russian homecare manufacturers also have a relatively small production capacity and will struggle to meet any sudden excess demand, as a result raising the average price of the consumer’s shopping basket. The sudden limiting of supply of homecare products will not only impact the homecaremarket, but it will also echo across the wider consumer pool. So this will not only raise the average prices paid by Russian consumers, but will also cause concerns about the disappearance of well-known brands from the shelves.

Thirdly, the aforementioned multinational homecare companies have dominant positions in the Russian market, driven by the strength of their brands. Russian consumers prefer European and US brands due to their reliance on the quality that they are perceived to have, and which are supported by innovative product line extensions and wide promotional campaigns. In the hypothetical case of an outright ban on key homecare brands, Russian consumers will likely obtain their favourite homecare brands via the informal market.

There is no strong evidence to support the idea that imports from emerging manufacturing markets, such as Turkey, Brazil or China, could potentially replace a supply vacuum left by European or US homecare brands. Russian consumers might also be unwilling to downgrade their homecare basket to less preferred Russian brands or less well-known imported ones. Added to that is the fact that local homecare manufacturers or newly imported ones do not necessarily have the same level of brand equity as that of the multinational brands, and will therefore struggle to convince Russian consumers to opt for their products.

All in all, a ban is highly unlikely to be expanded towards a wider range of homecare portfolios. APCoHM, the industry representative, is already in dialogue with Rospotrebnadzor to try and disclose the details behind the SKU restrictions. The industry and retailers in Russia will just have to keep their ear to ground and wait for the regulator to respond with further instructions.